Shareholders,
Supersized

The so-called
activist investors flocking to Wall Street are major shareholders
with hedge fund money, and they are using their clout to push
around companies like Dell, Sony and Apple.

Microsoft executives faced an unusual challenge in April when a $12
billion hedge fund, ValueAct, announced that it had bought a nearly $2
billion stake in the company with the intention of shaking things up.

To many analysts, the
possibility that ValueAct, with less than 1 percent of Microsoft’s stock,
could succeed seemed improbable at best. The firm buys shares in companies,
hoping to fight for board seats and change the targets’ corporate
strategies.

But that small stake
appears to have had outsize influence. On Friday, Microsoft agreed to let
ValueAct meet regularly with some of its directors. And the hedge fund’s
president, Mason Morfit, could join the board within several months.

Once considered purveyors
of a niche investment strategy, so-called activists like ValueAct have leapt
onto the big stage as hedge funds wage bolder battles against ever-bigger
corporate targets like
Apple, leaving executives wondering if they could be next.

Unlike their predecessors
who often pursued aggressive takeovers for quick gains, this latest
generation of activists are largely agitating for some sort of long-term
change — a shift in business strategy, a different use of cash, even a
complete overhaul of a company’s board.

Robust returns in recent
years and new money racing into these funds at a rate not seen in seven
years have given activist investors — as defined by industry experts like
the firm Hedge Fund Research — a war chest of $84 billion, more than double
the assets they oversaw just four years ago. That money has fueled
activists’ ambitions, with mixed results.

Over the last two years,
activists have taken aim at a number of blue-chip companies, like
Procter & Gamble and
PepsiCo. And one of the best-known players, Daniel S. Loeb, has even
gone abroad, pushing for change at
Sony, an icon of Japanese business.

Some battles have led to
big victories. This spring, the hedge fund TPG-Axon successfully pushed for
the ouster of SandRidge Energy’s chief executive, Tom Ward.

But others have led to
tough losses: the billionaire William A. Ackman, who lost hundreds of
millions of dollars in investor money in his campaign against Target,
resigned from the board of
J. C. Penney two weeks ago after unsuccessfully calling for the removal
of its chairman; he sold his stake at a loss of nearly $500 million. And Mr.
Loeb was unsuccessful in persuading Sony to partly spin off its huge
entertainment arm.

This burst of activism is
the latest evolution of efforts to push companies to change their behavior
through investing.

In the 1980s, corporate
raiders like T. Boone Pickens and
Carl C. Icahn engaged in hostile takeovers or leveraged buyouts of
companies, or sought to be bought out themselves at a profit. (Some of
yesterday’s raiders, like Mr. Icahn, are today’s more
public-relations-friendly “activists.”) In the 1990s, big pension funds like
the powerful
California Public Employees’ Retirement System took up the mantle,
pressing for change not only in corporate governance but also on social
issues like doing business in apartheid-era South Africa and protecting the
environment.

Unlike the raiders, the
current activists contends they are fighting for the interests of
shareholders. To that end, the activists most often seek to appoint allies
to board seats to help fight against what they see as complacent management
and to bring more discipline to companies.

There is some evidence
that the results bear that out. A study led by Lucian Bebchuk, a professor
at Harvard Law School, published last month argues that companies singled
out by these investors improved their operating performance within three
years of an activist campaign.

Others are not so sure.
Lawyers at Wachtell, Lipton, Rosen & Katz, one of the premier defenders
against activists, said in a client note earlier this week that such
campaigns had damaged American companies with an emphasis on the short term.

The hedge funds are
financing activism with their healthy returns. Through the end of June,
activist funds are up 9.6 percent, behind the 19.6 percent surge in the
Standard & Poor’s 500-stock index but ahead of the 7.7 percent gain by
equity-focused hedge funds at the end of June, according to Hedge Fund
Research. Activist funds returned on average nearly 13 percent between 2009
and last year.

In turn, investors have
plowed nearly $4.7 billion so far this year into funds deemed activist by
Hedge Fund Research, the highest inflows since 2006.

Analysts say that the
environment is ripe for activists. The rebounding markets have opened the
door for mergers, while companies continue to hoard cash. David Einhorn of
Greenlight Capital and Mr. Icahn have each taken aim at Apple’s reserves —
more than $146 billion as of June 29 — pressing the company to return more
cash to investors.

If Mr. Icahn is to be
believed, Apple is willing to listen. “Spoke to Tim. Planning dinner in
September,” the septuagenarian activist wrote in a
Twitter post last week, referring to
Timothy D. Cook, Apple’s chief executive. “Tim believes in buyback and
is doing one. What will be discussed is magnitude.”

And while the old guard,
including Mr. Icahn, Mr. Ackman and
Nelson Peltz remain active in numerous corporate battles, newcomers are
trying their hands as well.

Earlier this summer, Larry
Robbins’s Glenview Capital Management fought and won its first public
activist campaign, persuading shareholders of the hospital chain
Health Management Associates to replace the entire sitting board with
eight independent nominees.

And an investment firm
founded by David Gottesman, a director of
Warren E. Buffett’s
Berkshire Hathaway, shifted from its normal buy-and-hold strategy to
wage war for control of the drug maker
Vivus. In a letter sent to executives this spring, Mr. Gottesman’s firm,
First Manhattan, noted its five-year tenure as a shareholder, followed by
its conclusion that the company needed a more experienced and independent
board.

Last month, the two
settled, with First Manhattan gaining a majority of board seats and its
choice of chief executive.

Traditional mutual funds
and asset managers have become more open in supporting activist campaigns as
well, after years of shying away from the hedge funds as loudmouthed,
bare-knuckled brawlers. Mr. Icahn’s fight against the proposed takeover of
Dell Inc. gained support from unlikely sources like
T. Rowe Price and Franklin Mutual Advisers.

Corporate executives are
taking activist investors more seriously than ever.

Companies monitor their
shares for signs of an activist and are quick to hire advisers when an
insurgent investor emerges. And more than ever, they are willing to offer a
compromise — a board seat or two, an exploration of asset sales — to head
off an all-out battle for control.

“Companies are trying to
engage with the activists early, below the radar, so that things don’t have
to bubble up to the surface and become public, which is extremely disruptive
to the company,” said Damien Park, the founder of Hedge Fund Solutions,
which consults with companies and hedge funds on activism.

Years of legal battles
have also whittled away traditional corporate defenses against activists.
Many companies now elect their boards annually, as opposed to “staggering”
director elections every year, making it easier for dissidents to gain
control.

Activists have grown up,
too.

“Activism in general has
become more sophisticated than it used to be,” said David Rosewater, a
partner at Schulte Roth & Zabel who regularly represents activist investors.
“You need to have a real plan, an in-depth understanding of the company and
a compelling argument to shareholders about how you’re going to do it
better.”

A version
of this article appears in print on 08/31/2013, on page A1 of the NewYork
edition with the headline: With Huge War Chests, Activist Investors Tackle
Big Companies.

This Forum program is open, free of charge,
to anyone concerned with investor interests in the
development of marketplace standards for expanded access to
information for securities valuation and shareholder voting
decisions. As stated
in the posted
Conditions of Participation, the
Forum's purpose is to provide decision-makers with access to
information and a free exchange of views on the issues
presented in the program's Forum
Summary. Each
participant is expected to make independent use of
information obtained through the Forum, subject to the
privacy rights of other participants. It is a Forum
rule that participants will not be identified or quoted
without their explicit permission.

This Forum program was initiated to address
issues and objectives defined by participants in the 2010 "E-Meetings"
program relevant to broad public interests in marketplace
practices, rather than investor decisions relating to only a
single company. The Forum may therefore invite program
support of several companies that can provide both expertise
and examples of leadership relating to the issues being
addressed.

The information provided to
Forum participants is intended for their private reference,
and permission has not been granted for the republishing of
any copyrighted material. The material presented on this web
site is the responsibility of
Gary Lutin, as chairman of the Shareholder Forum.

Shareholder Forum™
is a trademark owned by The Shareholder Forum, Inc., for the
programs conducted since 1999 to support investor access to
decision-making information. It should be noted that we have
no responsibility for the services that Broadridge Financial
Solutions, Inc., introduced for review in the Forum's
2010 "E-Meetings" program and has since been offering
with the “Shareholder Forum” name, and we have asked
Broadridge to use a different name that does not suggest our
support or endorsement.